Pension buy-outs: incorporating pension scheme trustees before winding-up

One possible layer of protection is to move to an incorporated trustee structure. This involves individual trustees being replaced by a sole corporate trustee, with those individuals becoming directors of the trustee company rather than acting as trustees in their own right. 

There are benefits to incorporation, both in terms of protecting against individual liability and, for professional trustees, protecting their business interests. There are also some limitations and consequences which trustees should be aware of.

Corporate veil

The main benefit, when it comes to protection against liability, is the so-called ‘corporate veil’. As a general rule, directors of a corporate trustee are not liable for breaches of trust committed by the trustee company itself, even if they were involved in that breach. The individual directors do not owe a direct fiduciary duty to the beneficiaries of the scheme; these duties are owed by the corporate trustee itself.

This means that where the actions of the trustee directors cause the trustee company to commit a breach of trust, claims should be brought against the trustee company itself, not the individual trustee directors. 

There are some limited circumstances where trustee directors can incur personal liability and the corporate veil can be ‘pierced’. A claimant could try to bring an indirect claim against the directors on behalf of the trustee company – known as a ‘dog-leg claim. Broadly speaking, in the absence of dishonesty, courts have been reluctant to permit a claim against the directors on a ‘dog-leg’ basis for a breach of trust by the company.

Fines and penalties

There are some liabilities that the corporate veil will not protect against. Certain civil or criminal penalties may be imposed directly on the individual directors. For example, the Pensions Regulator can impose penalties on individual directors where an offence by the corporate trustee is done with the “consent or connivance” of the trustee directors. Similar provisions apply to criminal offences under the Pensions Act 2004 and Pensions Act 1995. 

HMRC and the Information Commissioner’s Office have similar powers, but again these tend to apply when there is either some involvement in the commission of an offence or some form of dishonesty.

Companies Act – restrictions on indemnities

Moving to a corporate trustee can potentially affect the scope of indemnity protection available from the sponsoring employer, depending on the ownership structure of the trustee company.

An indemnity from an employer to a director of an associated company – such as the director of a trustee company if that company forms part of the employer’s group – needs to comply with the Companies Act 2006 limitations.

Under that Act, most provisions to exclude the liability of directors for negligence, default, breach of duty or breach of trust are void. Directors of pension trustee companies may, however, be indemnified under 'qualifying pension scheme indemnity' provisions.

A qualifying pension scheme indemnity must not cover liability for criminal fines or regulatory penalties, or the cost of defending criminal proceedings where the director is convicted. 

This isn’t usually seen as a significant issue or blocker to incorporation, but it is a legal consequence that ought to be understood. 

Protection for professional trustee businesses

As far as individual trustees are concerned, the corporate veil can provide a very helpful layer of protection against personal liability. For professional trustee businesses, it is important to distinguish between the personal liability of trustee directors and the liability of the trustee company as a business.

If a professional trustee company is directly appointed as a trustee, the corporate veil protects the professional trustee representatives from personal liability, but the professional trustee’s business itself will have exposure because it is an individual trustee without the protection of the corporate veil.  

However, if a professional trustee is a corporate director of a corporate trustee, the ‘business’ will be protected in addition to the individuals representing the professional trustee business – as claims would be against the corporate trustee.

The structure needs to be considered carefully though, particularly where a professional trustee is the sole trustee – as section 155 of the Companies Act 2006 requires that every company must have at least one director who is a natural person. 

Risk exposure of the ‘final’ trustee

Another consideration is whether incorporation provides protection from claims arising from decisions which have already been taken by the individual trustees. Put another way, does being the final trustee at the time of wind-up increase potential liability?

Under general trust law principles, a trustee can’t escape a liability by resignation – they will remain liable for any acts, omissions or breaches while they were a trustee. So, substituting the individual trustees with a corporate trustee would not of itself absolve the individual trustees for liability for decisions taken “on their watch”. 

Since it is rare for trustees to be found personally liable, this does not generally lead to additional liability for the last trustee in place, but it will involve the time and trouble of defending a claim. 

In theory, if a trustee can show that a former trustee caused a loss, it may be possible to sue that former trustee. However, this is rare in practice because of the difficulty of proving negligence by a particular trustee, and because, in practice, the final trustee is unlikely to be found personally liable anyway.

In practice, if a trustee is incorporated in the run-up to a buy-out and wind-up, then any claims during the period of winding-up are likely to be brought against the trustee in place at the time. The same goes for claims brought after the winding-up has been concluded – particularly as one might expect that the most likely claim at that point is a beneficiary, or missing beneficiary, claiming that the corporate trustee failed to secure the correct level of benefits for the member on buy-out. 

If the final trustee is a corporate entity of which the professional trustee was a director, the professional trustee should be less in the frame for future claims than if it was one trustee on a board of individual trustees.

Dissolving a trustee company after wind-up

If incorporating the trustee, it is important to think about what will happen to that company after the pension scheme is wound-up. Usually, the sponsor won’t want to keep a dormant company on its books for an extended period, which leads to a discussion about dissolving the trustee company.

On one view, dissolving the trustee company after wind-up could reduce the trustee’s exposure to potential claims. If the trustee company has been dissolved, it will cease to exist as a legal entity and therefore claims cannot be brought against it, unless the claimant is willing to go through the legal process of applying to restore the company to the companies registry.

However, this might be perceived as going against the grain of what is in beneficiaries’ best interests. It also introduces the risk of claimants casting around to find a target to bring a claim against in the absence of the trustee company – which might result in a greater likelihood of interested parties seeking to bring claims, rightly or wrongly, against trustee directors, including any professional trustee business.

With this in mind, there are some practical advantages to not dissolving the trustee company immediately after wind-up. If a member has a legitimate claim, there will be a way for them to bring that claim and for it to be resolved without having to restore the trustee company. There are also advantages in terms of the trustee company being able to claim on insurance.

If a decision is taken to dissolve the trustee company, the best legal process for doing that will need to be considered. There are typically two main options:

• strike-off: an application is made, following the requisite period of inactivity, to have the trustee company struck off the companies register at Companies House; or
• members voluntary liquidation (MVL): the trustee company is dissolved following the conclusion of a solvent liquidation of the company.

Both routes achieve essentially the same outcome but follow a different process and timetable. Some forward planning would be needed, including allowing for budgetary expenditure. This is particularly important in the case of a MVL where the liquidator’s fees will need to be paid and the liquidator may want to have an expense reserve.

Read more on pension buy-outs:

• • Pension buy-outs: trustee liability post winding up 
  • Pension buy-outs: claim limitation periods post winding-up
  • Pension buy-outs: communicating with members about winding-up
  • Pension buy-outs: concluding the winding-up
  • Pension buy-outs: deciding how to use surplus on winding-up
  • Pension buy-outs: discharging DC assets on winding-up
  • Pension buy-outs: endgame issues for sponsors
  • Pension buy-outs: employer indemnities on winding-up
  • Pension buy-outs: issuing individual policies using assignment before winding up
  • Pension buy-outs: making the decision to fully buy-in
  • Pension buy-outs: managing a surplus on winding-up
  • Pension buy-outs: relevance of FCA’s Consumer Duty when winding-up
  • Pension buy-outs: residual risks cover for winding-up pension schemes
  • Pension buy-outs: managing the risk of ‘trapped surplus’ on winding-up